Ocean Power Technologies, Inc.

Good morning and welcome to the Ocean Power Technologies second quarter fiscal 2023 earnings conference call. A webcast of this call is also available on the company's website at www.oceanpowertechnologies.com. This conference call is being recorded and will be available for replay shortly after its completion. On the call today are Dr. Philip Stratman, President and Chief Executive Officer, Bob Powers, Senior Vice President and Chief Financial Officer, and Joseph DiPietro, Controller, Treasurer, and Principal Accounting Officer. Following the prepared remarks, there will be a question and answer session. I am now pleased to introduce your host, Mr. Joseph DiPietro. Thank you, sir. Please go ahead.

Thank you. After the market closed yesterday, we issued our earnings press release and filed our quarterly report on Form 10-Q for the period ended October 31, 2022. Our public filings are available on the SEC website and within the investor relations section of the OPT website. This call will include forward-looking statements that are within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include financial projections and other statements of the company's plans, objectives, expectations, or intentions. These statements are based on assumptions made by management regarding future circumstances over which the company may have little or no control and involve risks, uncertainties, and other factors that may cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. Additional information about these risks and uncertainties can be found in the company's Form 10-K and subsequent filings with the SEC. The company disclaims any obligation or intention to update the forward-looking statements made on this call. Finally, we posted an updated investor presentation on our IR website. Please take a moment to review it as it provides a nice overview of our company and strategy. Now I am pleased to introduce Dr. Philip Strathman.

Thank you, Joe, and good morning. We appreciate you joining us. I'm pleased with our progress on building our order book and sales pipeline. We had $2.9 million of orders, which is nearly six times what it was at the same point last year. We remain on track for our $9 million order target over the year as we continue to build our pipeline of feasibility studies, demonstrations, and future orders. Our most recent win has been the demonstration we are doing in Bahrain to show the effectiveness of autonomous vehicles when they're used in combination with power buoys and our proprietary MDA software. We just completed this demonstration and are actively discussing next steps in support of the Digital Horizon exercise. We had a nice quarter of steady progress on each component of our stated strategy, which is working. From a high level, we provide autonomous ocean intelligence solutions. These can be roaming or stationary and are usually powered by renewable energy. Our systems offer benefits to customers across multiple governmental entities, as well as customers in the commercial space. whether it is protecting offshore operations, gathering ocean intelligence, or supporting offshore developments. We reduce carbon footprints and lower operational expenses. Specific to our strategy, first, we have data as a service, where we had a good quarter on our pipeline of order activity of WAMVs. We also made progress on our MDA solution, which is now available commercially and is expected to begin to generate revenue in the second half of this fiscal year. We believe it is the start of a game-changing aspect to our business. We continue to get the most interest from divisions of the government, and we believe we are building a strong recurring customer base. As mentioned last quarter, we are working with the U.S. Department of Energy on the Phase 2 development of a next-generation wave energy converter. Specific to this project, we received the $1.1 million payment in the quarter, which is intended to be used to develop and test a modular and scalable Masson Spring wave energy converter power buoy over the next 24 months. This amount is included in the year-to-date order activity I referred to earlier. I would like to take a moment to make a few comments about our autonomous vehicle division. This division came to us via acquisition back in November 2021, so a little over a year ago. I could not be more pleased with its management team and the efforts to integrate the business with ours. Most notably, we are close to fully consolidating the manufacturing operations to our facility in New Jersey. will make us faster and be more cost effective we continue to seek opportunities to expand our customer base mostly in the government sector and oil and gas industry second is power as a service during the quarter we continue to have solid activity related to this component especially with inquiries on leasing as opposed to owning we continue to like our move in this direction since it brings the upfront investment level down significantly for our customers in addition We're having good success to date by pairing our power buoys with our WAMVs, and we expect this trend to continue going forward. Third is our strategic consulting services. We add another good quarter of activity related to consulting, especially around simulation engineering, software engineering, concept design, and motions monitoring. In short, I like the energy I'm seeing throughout the organization. We continue to position the company well with the industries we serve and our chosen verticals. With that, I'll turn it over to Bob for more details on our financials.

Thanks, Philip. I will start with revenue. For the quarter, our top line was $303,000, which compared favorably to the $247,000 in the prior second quarter. Year-to-date, our revenue generation is nearly 2x where we were last year. As Philip indicated, our orders are at $2.9 million year-to-date and growing. We expect... We continue to expect order activity and revenue to ramp meaningfully throughout the second half of the year. In terms of deferred revenue, our deferred contract liabilities are up $1.4 million in the quarter, most of which is related to the $1.1 million advance payment we'll receive from the model employee under development. I expect this to be recognized as revenue over the next 24 months as the project takes place. We are managing our COGS well. So far, we have had minimal issues with our supply, and we expect this to continue. Our parts and materials are available, and we have adequate inventory to continue to ramp our production, especially of WAMBs. With our established WAMB business and the continued growth of our higher margin strategic consulting business, we expect to build gross margin going forward. Moving to our cost structure, we continue to manage costs well. Our operating costs inched up sequentially by less than $100,000 in the first quarter and are now at $6.4 million. This includes our engineering and product development costs and our G&A. From a high level, we expect our revenue growth rates to far outpace our operating costs growth. Over the next few quarters, we expect similar movement in our cost structure as we saw in the second quarter. One final income statement item of note is the $1.2 million of other income in the quarter. This relates to the employee retention credits we applied for with the IRS in the second quarter for tax returns that we filed in 2020 and 2021 during COVID and when stay-at-home restrictions were in place. You can see a corresponding increase on our balance sheet and accounts receipts. We started to receive payments in November and expect full payment by the end of fiscal 2023. This is great work by our team to make this happen. Moving to our balance sheet, we ended the quarter with $46.2 million of combined cash, cash equivalents, restricted cash, and short-term investments, and no bank debt. Our year-to-date net cash used in operating activities was $11 million for the period and reflects a quarterly run rate in line with the past few quarters. From a financial perspective, we had a steady quarter. We are maintaining strong oversight of our costs and positioning our company for top-line growth. With that, Philip and I are happy to take your questions.

Thank you. The floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you want to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that is star 1 to ask a question at this time. The first question today is coming from Sean Severson of WTR. Please go ahead.

Thanks. Good morning, guys. Philip. Morning, Sean. Thanks for joining us. Thank you. Could you expand a little bit on the trip to Bahrain and the digital horizon? Specifically, I'm trying to figure out kind of what did you learn there from what you were seeing from them and what they were looking for? And then second of all, what would be the next steps there? I'm trying to figure out are we in like the – the third inning here, the seventh inning, for some type of deployment or getting towards material orders?

Yeah, no, that's great questions. Thank you, Sean. Certainly, we're very proud and humbled to be able to support the U.S. Navy and its efforts to increase its autonomous artificial intelligence capabilities, starting through Fifth Fleet in the Middle East and what plans U.S. Navy may have after that. We were one of several participants that was out there. We had three of our assets deployed during Digital Horizon, including several long-duration deployments that we carried out that went in excess of 24-plus hours. And we continue our discussions now on what this may mean in terms of next deployments that will go on. You've probably seen the public statements that US Navy has made through Central Command and General Carrillo, who stated during the Manama Dialogues in Bahrain, I think it was the weekend before Thanksgiving, that the plans for the Department of Defense are to have 100 USVs deployed in the region. by the summer of 2023. We obviously applaud and congratulate US Navy on that approach in increasing its autonomous footprint, and we look forward to supporting it in whichever way we can.

What other applications do you think this makes sense for when you look outside military deployment?

If you look at the deployments that we have been doing and demonstrating during Digital Horizon, It's very similar to some of the other work we have done previously and builds upon the abilities that we have developed as part of our proprietary maritime domain awareness solution. You get into the realms of supporting oil and gas companies and other offshore energy companies with monitoring of ocean areas on the surface. We quickly expanded into areas that are similar to what we are doing for EGP down in Chile, where we're doing subsea monitoring and water quality sensing. And then that obviously extends into illegal fishing, monitoring of protected areas, and quite frankly, infrastructure assessments in harder to reach areas where you're trying to remove operator out of harm's way.

My last question is on the R&D roadmap. So I think talk specifically about the MBA solution will be helpful, but also a bigger picture question. When you look at where you need to spend, want to spend, you know, emerging technologies, sort of commercializing technologies, can you just walk through, you know, a framework of what you're working on and where the spend is going to be in priorities? And, again, I'm particularly interested in that next round of MBA as well.

Sure. I mean, MDA, you know, we are offering and discussing it with commercial customers right now. But obviously, it being a technology-based solution, there's ongoing development that we do for additional user features, additional integration of other sensors that we didn't have before, and so on and so forth. Our primary focus is not on coming up with the next thing, but combining the current technologies that we have into a holistic offering that gives our customers the ability to utilize roaming and or stationary assets that can be combined with surface and subsea monitoring equipment without having to kind of, you know, needing to pick and choose amongst a whole range of companies, but rather offering them a one-stop shop of an integrated solution that can be as integrated or as diverse as they may require for their solutions.

So this isn't so much looking for next-gen, let's call it leading-edge technology. This is really becoming commercializing solutions at this point using the portfolio of technology. Is that what I'm hearing?

Absolutely. We have a robust set of platforms, and obviously we will continue to work on improved user features and additional features we can integrate into it. And we are continuing the development of the next generation Masson Spring Wave energy converter, which we're working together with the DOE under the grant funding that we have received to utilize that. But generally speaking, the primary effort is on getting a holistic set of assets out into our customers' hands that can easily collaborate and work with each other.

Great, thanks. I'll step back in the queue. Thanks, all.

Thanks, Sean. Appreciate it.

Once again, that is Star 1. If you would like to register a question at this time, we'll pause a moment for additional questions. Our next question is coming from Jeffrey Campbell of Alliance Global Partners. Please go ahead.

Good morning. Phillip, first I just want to ask, what are the expected benefits of the MOSWEC power buoy versus the current solution?

Thanks, Jeff. Good morning, and thanks for joining us. The power buoy that we have right now is entirely fit for purpose. What we are looking at, and similar to what I mentioned to Sean, is having a seamless, consolidated offering in the marketplace. By finishing the development of the Mosweg system, we'll be able to start consolidating hull shapes, when it comes to the buoy platforms, which will give us the ability to have one common hull shape, whether you're using it with a wave energy converter or without a wave energy converter, as we've done in the past with hybrid, thus further streamlining the offering and making it more cost efficient for our customer base.

And do you anticipate there'd be any manufacturing benefits from that as well, maybe in terms of internal costs for the company?

Absolutely. If you think about the supply chain benefits of moving to a common hull shape across all of the buoy systems, you know, you can start, you rapidly start being able to scale up, you know, raw material sourcing, you start consolidating, working on whip efforts, and obviously it becomes much easier to install the finished goods sites. So there's a whole bunch of benefits that come from the consolidation of those efforts as opposed to, you know, just the quote unquote benefit of a common house rate for the customer.

And I was wondering, can you provide us with any kind of sense of what the revenue implications might be if the USV sales, if you get some meaningful portion of that USV stated desire by the Navy in 2023?

Yes, as we've stated, we feel comfortable with the 9 million bookings forecast we put out for the current fiscal year. And we will work on expanding that for the next fiscal year. And I think the interest that we're seeing in the market and the broader demand picture is giving us comfort that our sales team and commercial team It can start concentrating on converting opportunities into additional orders and backlogs.

Well, without asking for too much specificity, should I take from that that the $9 million estimate that's on the books contains both commercial sales and forward payments of development projects, but also some military sales as well?

Yes, I mean, as you're seeing with the efforts that we've got ongoing, you know, currently at Digital Horizon and the work that, you know, we've discussed previously that we've been doing for Naval Postgraduate School, you know, we look forward to having a robust pipeline that contains a healthy mix of government and commercial orders and government being the defence and national security space, as well as efforts around, you know, non-defence spending on the government side.

And my last question is with regard to the oil and gas business. I mean, we're generally led to believe that offshore oil and gas development is due to be fairly static over the next future years. There can be a few exceptions like ExxonMobil offshore guy on it, but in general, fairly static. So I'm wondering what... What areas of application do you find that you believe you can grow into that industry, even as it itself seems to be sort of consolidating and pulling back?

Yeah, I think we will continue, as I mentioned, we will continue to support our oil and gas and sort of energy writ large customers in the offshore world with solutions around monitoring of lease areas, surface and subsea. As we've previously stated, we can support decommissioning efforts and well monitoring. And those specifically on the oil and gas side, our efforts will continue to pursue from an opportunistic standpoint.

Thanks very much. I appreciate the answers.

You're welcome. Thank you, Jeff.

Thank you. The next question is coming from Sean Severson of WTR. Please go ahead with your follow-up.

Thanks. Phillip, a quick follow-up question. How will you be looking at and how is maybe the government looking at maintenance on a product like this? So, you know, you're talking about an infield deployment. How would that, how would maintenance be taken care of? Would you train them to do this or do you envision them deploying, and it's a bigger picture question too, not just for that, but, you know, bigger rollout of maintenance and, you know, service things that you need to you need to take account for.

Yeah, I can't directly comment on how each individual agency or division of the government is going to deal with maintenance specifically. The way we look at it, and this is how we've mentioned this before, similar to data as a service, also on the vehicle side, we've been offering robotics as a service for a while. So we will provide operators that can support the onboarding and in-service training of our systems with our customers. And if there is a desire by the customer to maintain that service, we will obviously maintain that service. And equally, if there's a desire by our customer, specifically in certain spaces of the government, to move into maintenance and servicing by that agency or service itself, you know, we will provide a train-the-trainer approach where we will support and upskill the government and then provide, you know, spare parts and logistics maintenance as and when it's required going forward.

So my last question is regarding, you know, sort of the customization of the big data. Big data size, very interesting, obviously, subscription business. How much can you manage and customize what you're looking for. I'm assuming it's a function of this instrumentation, right, what you're putting out on there. So if you know that there's a big demand for service A, you can equip, you know, equip them with the correct instruments and be able to provide that service. But I'm just trying to understand, how do you figure out how you commercialize and what do you market to, you know, potential customers for big data?

Yeah, so on the proprietary side, obviously, we have our maritime domain awareness solution, which at the moment, you know, the proprietary part of that is primarily surface surveillance, intelligence and reconnaissance focused. But as long as it fits within the power budget, I mean, we've stated this before, we're sensor agnostic. So when to the extent that anybody wants to integrate other sensors into it, be they surface or subsea, you know, we will accommodate any of those customer requests. We're obviously collecting a large amount of data from our deployments that we have internally and to the extent where customers allow us to retain some of the data that we can collect from deployments that we'll be doing on behalf of others. And so, yeah, we continually use that data to refine approaches and provide additional insights to the customer base as we scale up and continue rapidly scaling up the deployments that we have globally.

Great. Thank you.

Thanks, John.

Thank you. The next question is coming from John Snow, a private investor. Please go ahead.

Hey, guys. Just a quick question on the projected $9 million of revenue. Will you be cash flow positive with potential $9 million of revenue?

Thanks, Sean. I appreciate the question. The 9 million of bookings that we have forecast for the current fiscal year are forming the basis of further growth. As Bob mentioned during our earnings announcement, we're continuing to manage our SG&A and our margins in general. And we will be building on the $9 million, which will put us on a solid path forward to achieve cash flow positive operations going forward.

So is that a 2024 cash flow positive? And with that, another question on why the delay in the annual meeting?

So the delay in the annual meeting is very straightforward. It was simply the fact that we were about 1 million votes short for quorum. Our corporate bylaws dictate that we want at least 50% of our shareholders to have their say on the items we put to vote. And we were just about a million votes short um of that you know we've got just under 56 million shares outstanding um and yeah we're just just slightly short of the quorum so we are giving our shareholders an opportunity to continue putting their votes in for or against the proposals that we've put out there and reconvene on january the 13th and the first question 2024 does that mean cash flow positive We're not providing any additional guidance right now other than the guidance that we've put out in the earnings release. Thanks. Thank you, John.

Thank you. We're showing no further questions in queue at this time. I'd like to turn the floor back over to Mr. Stratman for closing comments.

Thank you. We appreciate you joining us. I hope you can sense that our company is headed in the right direction. Thank you for being shareholders or potential shareholders of our company. We wish you a great holiday season and look forward to future updates. Have a great rest of your day.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines and log off the webcast at this time and enjoy the rest of your day.